Changing concentration in the New Zealand manufacturing sector

Abstract

This paper seeks to trace and analyse changes in seller concentration in New Zealand manufacturing industries between 1973-74 and 1995. The primary motivation for this research topic is the substantial liberalisation of industry and commerce that occurred over this period, which is expected to have had an effect on concentration. This study will hopefully provide a basis for future work into the impact of recent economic reform on the economy, in particular, the manufacturing sector. The rational underlying interest in industry concentration measures is that they are often regarded as giving a significant dimension of market structure by indicating market power and subsequently business behaviour and performance (Curry and George 1983). Concentration measures are therefore widely employed by professional economic staff during the formulation and administration of competition policy (Baldwin and Gorecki 1994). According to Harper (1992), there are three main analytical frameworks which concentration measures are generally considered: the structure-conduct-performance paradigm (SCP); the efficient structure doctrine; and contestability theory. Under the SCP paradigm, high levels of concentration are thought to be conducive to firms being able to make supernormal profits by raising prices above production costs and engaging in anticompetitive behaviour (Ellis, 1976; Ratnayake, 1994). Such activities can lead to a misallocation of resources and poorer economic performance than would otherwise be the case (Madge et al, 1989). The SCP is supported by empirical evidence that suggests there is a critical concentration point where there is an abrupt change from competitive behaviour to oligopolistic co-operation (for example see Pickford and Haslett, 1996). United States studies have typically suggested this critical level to be between 45 and 60. Therefore, according to the SCP paradigm, changes in concentration over time are crucial for informed industrial and antitrust policy (Harper, 1992). In contrast to the SCP paradigm, the efficient structure doctrine suggests that high concentration and high profits are a result of greater efficiency of some large firms. Competitive forces are believed to operate for the emergence of a size distribution of firms that minimises costs, suggesting that higher returns and higher market shares are a result of increased efficiency. The theoretical linkage, therefore, is not from structure to performance, but from performance to structure, hence, high concentration may not be cause for concern. The efficient structure doctrine also implies that concentration levels may be important for a relatively small economy like that of New Zealand if it is to compete with larger trade partners. The third framework, contestability theory, also suggests that a high level of concentration does not imply a lack of competition (Harper, 1992). The crucial feature of a contestable market is its vulnerability to hit-and-run entry. Contestability theory claims that it is possible that the performance of some markets may be acceptable despite the presence of only a small number of large firms. The above analytical frameworks imply different approaches to market concentration. Whatever approach is ascribed to, by providing up to date data on concentration movements, this report may provide a basis for future research. Determining movements in concentration in the manufacturing sector is important since the manufacturing sector comprises a considerable proportion of the New Zealand economy, as is made evident by the graph below. The manufacturing sector contribution towards Gross Domestic Product has remained reasonably consistent over the last twenty years. This contrasts with Australia where the manufacturing sector has declined as a percentage of Gross Domestic Product (refer to Madge et al, 1989)